This blog is an excerpt from our report titled “Exit Scenarios For Cybersecurity Growth Firms: Why Investors are More Likely to See Acquisitions than IPOs.” For more information, please log in to your SharesPost account or register here
Cybersecurity firms Zscaler and Carbon Black have enjoyed strong IPOs this year. But don’t expect the many emerging venture and private equity-backed startups to follow suit.
In part two of our series of reports on cybersecurity, we explain why we think corporations with major cybersecurity divisions will purchase these startups before they can go public.
Cisco, Microsoft, and Raytheon have been acquiring several cyber-startups in recent years, using their considerable cash to buy into every area of cyber-innovation. Symnatec, the most capable public pure-play company we tracked, has been particularly aggressive with M&A.
These top divisions, whose revenues exceed many of the leading pure play companies, enjoy a significant advantage over competitors. They can incorporate their own cybersecurity frameworks into the parent company’s existing products.
For investors, a M&A exit is probably ideal, given the mixed record of stand-alone companies trading on the public markets thus far. We looked at the performance of 8 cybersecurity IPOs 90 days after going public. About half of the companies suffered significant declines in value while the other half saw big increases.
In addition, our analysis of 10 publicly-traded firms indicates that every company that generated significant year over year growth in earnings before interest, taxes, depreciation, and amortization also showed significant EBITDA declines at some later point.
Here are four other major takeaways from the report:
Mega deals drive cyber financing Private investment in cybersecurity has rapidly grown over the past few years, reaching a record $10 billion in 2017. Cybersecurity “mega deals,” $100 million or greater, has jumped to 58 percent of all private deals last year from 25 percent in 2015. In other words, the growth in dollars invested has outpaced the number of deals over each of the past few years.
Private equity competes with venture capital for cyber deals Since 2015, 7 out of 18 private rounds over $100 million came from other PE firms providing expansion capital to companies that may not fit the traditional start-up model. PE investors have also used leveraged buyouts (LBOs) and other control transactions. PE investments are increasingly driving dollar growth in cybersecurity because such investors typically seek greater stakes in portfolio companies than VCs and are willing to use debt to acquire positions in relatively mature companies.
Cyber IPOs scarce as Big Tech snatches up companies Given the high level of uncertainty with cybersecurity IPOs, many companies might opt for more predictable M&A deals. We believe one-stop cybersecurity vendors, incumbents looking to fill gaps in products and expertise, will be the most likely buyers. For example, by acquiring Lookout, Symantec could strengthen its capabilities in application security, risk and compliance, identity access management, and threat intelligence.
Ten emerging companies to watch Companies like Tanium, CloudFare, and Duo Security are among a select group of private firms that have outmaneuvered the competition in an increasingly complicated environment. These companies are generally less developed and thus more prone to failure. However, thanks to strong performances to date and innovative approaches to less developed areas of cybersecurity, we believe they offer better growth prospects over more mature competitors.
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